Market Commentary for the week of September 9, 2013

Yet again.
The Syrian war crisis has prompted another “moment in time” for the markets to reflect and digest both the near-term and long term consequences of our response from a political and economic perspective.  What’s most worrisome is the precedent of previous actions the U.S. has taken in global conflicts, and the potential catalysts for negative consequences for the markets.

The direct impact of our response, of course, would be the humanitarian reasons we give as reason for action in the first place.  To that extent, any justification for intervention would be viable.

However, not only have we learned from previous incursions that there is a short-lived reaction, but we know now that repercussions might have a decades, if not generations, long effect.  Even if the “first strike” response is successful, we know not which threat might metastasize from the event.

With stocks nearly overvalued because of a remarkable year-long run, the probabilities are likely that a negative, or downside, capitulation is likely.  Sometimes investors flee into quality for protection, and sometimes they simply flee altogether.

Whether the market’s response is because of or in spite of the United States’ actions, prevailing relative strength quotients still dictate a cautious approach to investing while equities remain at the top of their parabolic rise.  If the markets could successfully digest all possible permutations of this crisis, then they might resume a fundamentals-based logic for optimism in the long term.

The biggest surprise to the global debate about Syria is how marginally other bourses seem to be affected.  Not only is the conversation focused upon a U.S. response, but the economic impact seems also to be narrowly focused. With that region half-a-globe away, only the S&P and Dow seem to be held hostage to emotion.  On the other hand, nations which should care about disjointedness in their region are acting like business as usual.

Accident or design?

There are only a few historical comparisons by which to compare this buildup of tensions followed by a “delayed reaction” to the crescendo of political and economic discourse.  Most recently, of course, was the drumbeat and buildup to the Iraq invasion in 2003.  We know that all-out war is not even being considered in this instance.  Knowing this, the markets can migrate without concern about total global conflagration.  Nevertheless, only a few have the conviction to put all they own into the financial markets right now.

Going back a generation, it didn’t matter what side you were on in the Cuban missile crisis…everyone was scared that we faced an “Armageddon-like” outcome.  As it happens, one year after that crisis, a steady economy and stable political situation netted a Dow gain of over 30 percent.

History redux.

Markets are constantly traversing parabolic hurdles.  Such is the framework of quantitative statistics and cyclic-based portfolio management theory.  The impact of fear, or war, cannot be mitigated by scientists, politicians, market theorists, or economists.  But we know that the reaction to such exogenous global events, while real, are usually fleeting and sometimes overdone.

This is not to suggest that the Middle East events shouldn’t be taken seriously.  In all likelihood there will be immediate ramifications to this crisis in the economic and political landscape, most likely a short-term spike in oil prices.  These events reverberate into military, household, and corporate spending, not to mention the psyche of disruption and unease.  But, similarly, they do not derail traditional fundamentals or existing secular trendlines simply because of their shorter-term effect.

We have just had our global recession.  Multipliers might exacerbate regional outcomes, but today’s global economic, political, and social priority is on maintaining peace and opportunity for all players.  If sanity prevails, this crisis will pass as others which came before.